Owning your own business is a fantastic adventure, full of extreme highs and lows. It can be risky. But as with building a house, setting the proper foundation for your business can help ensure long-standing success. Here are eight essential tasks that can help your business start on solid ground.
- Pick a company name
- Pick a business structure
- Register your business
- Apply for your Employer Identification Number
- Get business licenses and permits
- Open business bank accounts and set up your cash flow system
- Set up your accounting system
- Get proper insurance, if applicable
1. Pick a company name
What do you want to call this new thing that you’re birthing? As new parents know, picking a name sounds easy but can quickly become complicated. A good company name communicates who you are and what you want to do in the business world. It will drive branding and marketing and can have a tangible impact on the success of your business.
Before you pick a name, it’s wise to clarify a few things: your business’ vision and purpose, your ideal clients, and the value you bring to that group. The Lean Startup methodology provides an excellent framework for considering these issues. I also like the idea of using a one-page business plan. It will help you think clearly about your business without spending months or years trying to create the perfect plan. If you need additional help, check out Fizzle. They have some great ideas about developing clarity around your approach.
And remember, the name doesn’t have to be perfect. You can change it if you need to or operate “doing business as” (DBA) by filling out a simple form. So yes, give it some thought but not too much.
2. Pick a business structure
In addition to your business name, you’ll need a business structure before you can take the following steps. Your business structure affects all sorts of aspects of your business, like the paperwork you need to file, the formalities your business needs to follow, your liability, and how to pay taxes, among many other things. In addition, the business structure is fundamental with the new Tax Cuts and Jobs Act (TCJA) passed in late 2017. Pass-through entities such as sole proprietorships, LLCs, partnerships, or S-Corps can receive a deduction of up to 20% of certain business income.
Taxes shouldn’t be your only concern when you choose a business structure. Still, you’ll want to consult with a tax professional to make sure you’re making the best choice for you (especially if you’re a service business that may end up making a lot of money). You can check out this previous post for an overview of different business structures.
3. Register your business
Once you have a business name and business structure, you’ll have to register your business. I suggest starting at the state level. In most states, you’ll register through your Secretary of State’s office. Many of them have an online search function to make sure you’re not trying to register a duplicate name. This research goes for your company name and a DBA (although you may have a little more leeway with a DBA). You can look up your state agency here.
To protect your name at a national level, you may want to consider registering with the United States Patent and Trademark Office website. Lastly, make sure your domain name (or something similar) is available. You can do that through domain registrars like GoDaddy or Google Domains.
4. Apply for your Employer Identification Number (EIN)
An EIN is the federal tax number used to identify your business. Think of it as the social security number for your business. You’ll need this to get required business licenses, open bank accounts and credit lines for the company, and pay your taxes.
Technically, you don’t need an EIN unless you have employees or plan to form a partnership, LLC, or corporation. But, even if you don’t need one, it makes the most sense to get one anyway. You can apply online in just a couple of minutes. And you can keep your Social Security number private and reduce the chance of identity theft.
You may also need a state tax ID, especially if you’re paying state sales or employment taxes. Check with your state about its specific requirements and whether you need to take additional steps beyond applying for your EIN.
5. Get a business license and permits
Depending on what type of industry you’re in, a federal and state agency may regulate your business. For instance, if you manufacture, wholesale, import, or sell alcoholic beverages at a retail location, you need a specific license from the Alcohol and Tobacco Tax and Trade Bureau or the Local Alcohol and Control board.
Even if the federal government does not regulate you, you’ll likely need some sort of state, county, or city license. And you may need multiple permits or state registrations if you’re doing business across state lines. For example, registered Investment Advisors (RIAs) have to register in different states depending on the number of clients they have in a specific state.
All sorts of complex rules exist with different licensures. For instance, my barber couldn’t set up in a specific location because he was too close to another shop. So make sure to research your state, county, and city regulations for your particular type of business.
6. Open your business bank accounts and set up your cash flow system
You’re almost there. You just have a few more operational tasks. Next, get business bank accounts and set up your cash flow system. Opening separate bank accounts allows you to keep your business and personal assets separate (essential for tax and legal purposes), establish the company as a separate entity if you need to apply for a loan, and set up merchant accounts to get paid faster.
Additionally, cash flow is the life-blood of your business. Yet, so many companies act in a way that it will somehow take care of itself as long as you have enough revenue coming in. You may even leave it to your accountant to tell you how you’re doing. And while assessing your revenue and client pipeline is essential, conquering cash flow takes some thought and intentional systems.
I like to use the Profit First System, developed by Mike Michalowicz. Rather than reading and using profit and loss statements, most entrepreneurs resort to “bank account balancing,” where we check our bank balance and make decisions based on what we see. This system focuses on leveraging that habit rather than trying to change it.
The system works by allocating money into five different buckets:
- Owner’s Comp
- Operating Expenses
All business income goes into the income account. And then, on the 10th and 25th of each month, you allocate that income into preset percentages based on your real business revenue. Allocating your money in this way ensures that your business is profitable (because you give yourself a bonus every quarter). You also pay yourself and reasonable wage and have money to pay your tax bill every quarter. Additionally, it helps you become more efficient with your operating expenses because you can use a fixed amount.
Using this system allows you to continually monitor how close you are to your targets for revenue and profits and lets you know in real-time when there is a problem. This system empowers business owners to take control of their cash and become more intentional about it, and it’s easy to incorporate because it accentuates behavior that we already employ. You can read more about the system here or listen to my recent interview with him.
You need your business name and EIN (you might also need your registration documents) to open your accounts. Most banks offer business banking services. You can choose a brick-and-mortar institution in your area or even an online bank. It’s often easiest to use the bank or credit union that you bank with personally, making it easier to transfer assets between your business and personal accounts. But remember, keep your business accounts just for business transactions and your account just for personal transactions.
7. Get an accounting system
This point is also an excellent time to set up an accounting system like Quickbooks or Wave. These systems allow you to start tracking your business income and expenses right away so you can take advantage of all of your proper tax deductions. As a tax attorney, I represented clients who didn’t keep good records before the IRS, and it was brutal. It’s much easier to start the habit early when you don’t have a lot going on rather than keep up after things get going.
8. Find the proper insurance
Lastly, you want to protect your new business by having the appropriate type of insurance. While your business structure may protect you from personal lawsuits, you want to make sure your business is protected as well. Some common types of business insurance include general liability insurance, professional liability insurance, and home-based business insurance. Check with your insurance provider to make sure you’re covered.
Starting a business can be a daunting task. But taking the time to set a proper foundation is essential to future success. Also, I’m here to help. So don’t hesitate to ask if you have any additional questions.